In a June 2018 article titled Deep insights, broad solutions: How banks can win in the vast housing ecosystem, McKinsey & Company authors Miklos Dietz, Reka Hamvai, Miklos Radnai and Michael Yee argued that banks must broaden their scope without losing their focus on individual consumers if they are to ultimately win control of what is arguably the largest financial ecosystem on the planet.
The authors suggested that to develop true housing ecosystems that meet the full spectrum of customer needs, banks need to balance two perspectives that may at first appear to be in conflict.
“On the one hand, they need to broaden their scope. The value of an ecosystem is closely tied to how many connections it can make in the service of customer needs.
“Banks should look beyond home buying and traditional mortgage and insurance products to address the entire customer journey — purchasing a home, living in it, renting it and eventually selling it — and recognise broad issues in national and global housing environments.
“At the same time, as they take a wider view of the customer housing journey, banks need to continue to deepen their understanding of customer needs and preferences, focusing on the details that will make the ecosystem a time and money-saving solution for individual consumers.”
Given that banks already have an established position in mortgage lending and extensive knowledge of the financial habits of their customers, the McKinsey authors believe they are in a strong position from the start in the race to provide ecosystem solutions for housing.
However, with such an enormous market at stake (the value of residential real estate in the United States, for example, is $24.5 trillion), competition from other industries is undeniable.
“Large technology firms can capitalise on the relationships and extensive data in their rich retail platforms. Some of these firms are already established in digital personal finance and adding mortgage capabilities would be a logical extension,” the authors said.
“Banks may have a natural advantage in starting ecosystems, but they will not be able to rely solely on that advantage in competing with digital superpowers.”
The McKinsey report highlights a number of important examples where banks and non-financial institutions have started broadening their offerings in an effort to target the housing ecosystem.
One example given is the Commonwealth Bank of Australia’s housing platform, which combines chosen locations and public data to assist customers with property searches and valuations.
“In China, Ping An launched its innovative platform in 2014 and currently offers a range of internet-based finance products,” the authors noted.
“In the US, financial software developer Quicken has offered the digital Rocket Mortgage service since 2016, and Bank of America introduced a digital product in 2018; both offer a streamlined application process online or via smartphone app.”
Meanwhile, non-financial companies have joined the market as well, such as UK-based Zoopla, which started as a home-search service and extended into mortgage brokerage (through the acquisition of money.co.uk and an investment in online broker Trussle), insurance and utilities services.
“In the fintech realm, Silicon Valley-based Point purchases shares of people’s homes, enabling owners to raise capital without periodic interest and principal payments. Digital mortgage applications are available through several fintechs, including Habito and Trussle in the United Kingdom, which link prospective buyers to banks, making financing simpler and quicker,” according to the McKinsey report.
However, if banks are to ultimately dominate the housing ecosystem, McKinsey believes that in addition to taking “as broad a view as possible of the housing journey”, they must develop a “deep and detailed view” of the needs and preferences of customers.
“They need to identify which customer segments are most attracted to the ecosystem proposition, how to approach them and which are most valuable,” the authors said.
“Deep insights on what provides value to customers — saving money, saving time or finding convenience — will lead to effective solutions that engage customers in the ecosystem approach.”
In 2017, McKinsey surveyed 1,500 consumers and considered recent home purchasers’ satisfaction with 10 important components of typical home purchases, covering home search, financing, purchase, maintenance and eventual sale.
“Responses indicated that four steps in the process are crucial in determining home buyers’ level of satisfaction: applying for a mortgage, bidding for properties, closing the purchase and using the knowledge resources available to plan the home buying journey from start to finish,” the authors said.
“Not coincidentally, these steps also inflict the most pain on home buyers.”
Interestingly, the McKinsey’s 2017 surveys revealed important differences between the US and UK markets.
In the United States, buyers relied most heavily for guidance in the purchase process from their real estate agents, while in the United Kingdom, buyers favoured mortgage brokers for guidance.
“Moreover, US buyers were inclined to manage more of the process themselves through digital means, but UK customers preferred human interactions,” the report found.
“Orchestrators of ecosystems will need to make frank assessments of their capabilities to meet the needs of the market segments they target, bringing their own skills to bear but turning to local partners as well to assure quality, timely execution and an understanding of consumer preferences.”
In Australia, research conducted by ING found that 61 per cent of Millennials are unaware of how much they need to save for a home loan deposit, as more than a third (38 per cent) look to purchase a home within the next three years.
Moreover, of the respondents that claimed they knew how much they needed to save, $76,000 was considered the average deposit needed to obtain a home loan.
ING found that the average deposit required by FHBs was $135,000.